Ty's Take For 4-21-2017

In writing the articles for this week, I did my usual review of 10-20 news stories everyday. And most of the stories were fairly mundane. Everyday occurrences like: Oil Company X Acquires drilling rights in Y. And really, over the past few weeks, I feel as though oil markets have been fairly stable. Indeed, at the time I’m writing this article (or drafting it), oil prices have only moved about $0.03 from where they started April. Now granted, in that time they went higher and then fell back lower. But overall, they just seemed to ebb and flow. Some days a little more than others.

So when I went to put together this week’s Five Star Standard, I had to really think what to write about. And as I review several different sources everyday and take some notes of articles, etc., I looked back at my notes and started realizing there were some themes emerging.

First, while there were certainly experts out there claiming doom and gloom is soon to fall upon us, those were fewer and further between. Most experts, such as the Saudi oil minister, and others cited in the articles this week, all seem to believe that oil markets are coming into balance and are likely to stay in balance for at least some period of time. That is a major shift.

And more importantly, there seems now to be a consistent emergence of people claiming that we should not be just worried about excess supply, but the lack of excess production capacity. They argue that the bigger problem is that the world has lost production capacity as a result of the significant decrease in new investment; and thus, any recovery is sustainable. Sure, shale will help lessen the blow, but their argument goes along the lines of this: U.S. Shale only represents 5% of current world production. Even if it dramatically increases, it cannot increase enough to offset the effects of lost megaprojects. And current producers ( particularly certain members of OPEC) were pumping at or near capacity at the time they agreed to cuts. Therefore, they conclude, we are at the beginning of a new cycle. One that might not be characterized by oil consistently over $100 a barrel, but will be characterized by substantial drilling.

Now of course, there are still naysayers saying OPEC is not cutting what they say they are cutting and that U.S. shale will keep inventories high. But that seems to be the conundrum. There are those that view the lack of decline in U.S. inventories as a sign that shale is booming more than the production numbers suggest (remember the numbers often lag actual production); while others view it as a cyclical response to refinery maintenance season and see the U.S. data skewing perception – as discussed in another article this week.

And again, herein lies the rub. As emerging economies (China and India) become more and more important to the world in terms of worldwide oil demand, they do not have transparent numbers so the world still looks to the United States. Which now has more of its own relatively quickly reactive supply (in terms of bringing new production online). Thus, the U.S. numbers skew the inventory data and the perception of the rest of the world.

A very interesting argument indeed. Because if you look at U.S. numbers, you see that overall imports are not down by some staggering amount and that inventories remain high. Yet, other data suggests that worldwide inventories are at least flattening, if not depleting. And in a world where more and more oil demand is driven by those countries whose numbers are not transparent, this creates a bigger chance that supply deficit/surpluses will be harder to foresee and predict.

And the other consistent theme is that worldwide oil production is not yet in recovery, despite the fact that it appears the next upturn has already started here in the United States. Almost everyone seems to agree on this point. But there seems to be an emerging consensus that the worldwide recovery may be stalled for a bit longer. Even the IEA, which sees growth outside of OPEC, seems to suggest that the majority of the growth will come from U.S. Shale while others lose production capacity. This may be a result of shale’s adaptation to the new market place or the structural ease of pumping oil in the U.S. vs some other country.

So overall, I saw a more intellectual trend in the past few weeks of analysts looking to understand the way the worldwide data interacts and trying to reconcile inconsistent themes – OPEC compliance is high, but allegedly stocks are growing or at least not shrinking, and futures markets seem to be suggesting oil is not balancing.

Despite writing an article this week suggesting that the U.S. data may be losing some of its importance, I would like to consider something that neither of the articles on U.S. data mentioned: the fact that since the 70s, we have only recently been able to export oil. And now, we see American oil starting to travel across the world, maybe those numbers will not be as skewed as people think. While I think that is a few years from happening, I do think it is something to keep an eye on.

So where do I see things? Overall, I remain bullish – albeit like most, I think that markets will reach balance later in the year rather than earlier. And before that happens, I don’t see a full worldwide recovery. But I think the U.S. will keep going.

I also think OPEC will extend the cuts as long as the non-OPEC producers go along. In my mind, OPEC’s extension is giving up another 6 months of full production in exchange for potentially years of upside, or risking a fragile recovery. And while some would argue they have to worry about shale taking their market share, I simply don’t see that happening in the long-term.